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What Should I Expect During a 401(k) Audit?

Published by Kim Moore on Jan 17, 2022 6:00:00 AM

If you just found out that you need a 401(k) audit and the concept of an audit is new to you, you’re probably wondering what to expect during the audit. We’re going to cover some of those areas in this blog post.

  • Fees –
    Of course you will have to pay the auditor for the audit. You may be wondering how much an audit will cost. Each audit firm determines their own price for the audit. However, the audit cost is usually determined based on a few factors, such as: what type of audit is needed, how long does the audit firm believe the audit will take, how big is the plan being audited (i.e. number of participants, assets under management, number of separate companies covered by the audit), and how complex is the plan focusing on the types of transactions allowed, investments held by the plan and contribution types. Some firms charge an hourly rate, some offer an estimate of the fees, and some (like Summit) charge a fixed fee. You should inquire of the prospective firm, how the fees are determined to ensure as you compare prices you are comparing like quotes.401k plan Audit

  • Documentation –
    Audits require a substantial amount of documentation. You’ll want to ask your auditor what types of documentation they will need and how they will request, and you will submit that documentation. It is very important that they provide a secure mechanism to transport the information needed as much of it will be confidential. The auditors will typically need information such as the Plan Document and related agreements, the Plan Census, discrimination testing results for the plan, bank statements, HR and Payroll data for selected participants, distribution and participant loan documentation for selected participants, the draft Form 5500 and plan trust report or audit package. They will also request information related to the service providers that are used including agreements between them and the Plan Sponsor and SOC reports (Service Organization Controls Report) describing the evaluation of controls at the sponsor. It is very important that you complete all requests made by the auditor as timely as possible. Delays in the providing the documentation can cause your audit and related Form 5500 filing to be late. Also, don’t be afraid to ask questions of your 401(k) auditor if you are unsure what they need, or a specific request is unclear. The auditor would much rather answer your questions that have to request information a second time.

  • Evaluation –
    Your auditors will take the documentation requested and they will test it against other documentation provided by the service provider or other source. They may recalculate values and compare information from period to period. If their results differ from what is expected, they will share the results with you to determine if they need other information to match the expectation or if there has been an error. The 401(k) auditor should share all issues identified with during the audit and also review them at the end of the audit.

  • Final reporting package –
    At the conclusion of the audit, the 401(k) auditor will provide a set of reports that you will provide to the IRS and Department of Labor along with your Form 5500 filing. The report package should include: an audit opinion letter, financial statements, footnote disclosures and any required supplemental schedules. Usually this is all included in one package. The final report must be provided electronically to file along with the 5500 on the EFAST System. Make sure you review all the information in the package and do not be afraid to question anything you do not understand or believe is incorrect.

The 401(k) audit process can be daunting at first due to the amount of documentation needed, the time involved and the level of complexity and detail the auditors will review. Make sure you and the 401(k) auditor working on your plan have clear expectations of what will be needed and the time-frame required for submissions. Any delays in either providing the needed information or delays on behalf of the auditor could cause a late filing which can result in significant fines and penalties to the sponsor from either the IRS and/or Department of Labor.

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At Summit CPA we specialize in retirement plan audits. If you would like to discuss our audit process in more detail or need an audit contact our office at (866) 497-9761 to schedule an appointment. We can help you navigate the world of the 401(k) audit as proficiently as possible. We also offer off-site assistance and flat-fee pricing so there are no surprises when the job is complete.

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